What happens to the cash value if a policyholder chooses to borrow against their whole life policy?

When a policyholder chooses to borrow against their whole life insurance policy, the cash value of the policy is indeed used as collateral for the loan. This means that the lender has a security interest in the cash value, ensuring that if the policyholder defaults on the loan, the outstanding amount can be taken from the cash value.

The structure of whole life policies allows policyholders to accumulate cash value over time, which can be accessed through loans. However, this cash value does remain available to the policyholder as long as the loan is not in default, but it serves specifically as collateral for the borrowed amount. This function emphasizes the dual role of cash value in providing a source of funds as well as serving as security for borrowing.

Although the cash value is accessible, taking a loan against it may impact the death benefit and the overall growth of the policy. If the loan is not repaid, it will be deducted from the death benefit upon the policyholder’s passing. This complex relationship between borrowing and cash value is a key aspect of understanding whole life insurance policies.